Tuesday, August 26, 2014

Consumers can't be forced to use nonexistent arbitration proceeding

The Seventh Circuit reversed the district court’s holding
that it could not hear consumer claims against payday lenders doing business
from a tribal location.

Martin Webb was an enrolled member of the Cheyenne River
Sioux Tribe and owned/did business with the other defendant entities. Defendants
made short-term loans using the internet, allegedly in violation of Illinois
civil and criminal statutes. The district court held that the loan agreements required
that all disputes be resolved through arbitration conducted by the Cheyenne
River Sioux Tribe on the Cheyenne River Sioux Tribe Reservation, located within
the geographic boundaries of South Dakota.

After further proceedings, the district court concluded that,
although written tribal law was available to the public and thus to the
consumers if they investigated, the arbitral mechanism detailed in the
agreements didn’t exist. Thus, the court of appeals held, plaintiffs’ action
shouldn’t have been dismissed because the arbitral mechanism specified in the
agreement was illusory. The court of appeals also rejected defendants’
alternative argument that the loan documents require that any litigation be
conducted by a tribal court on the
Cheyenne River Sioux Tribe Reservation. Tribal courts “have a unique, limited
jurisdiction that does not extend generally to the regulation of nontribal
members whose actions do not implicate the sovereignty of the tribe or the
regulation of tribal lands.” Because there was no colorable claim of tribal
jurisdiction, exhaustion in tribal courts wasn’t required.

The defendants charged approximately 139% in interest each
year; the $2,525 loans received by plaintiffs cost approximately $8,392. The
loan agreements recite that they are “governed by the Indian Commerce Clause of
the Constitution of the United States of America and the laws of the Cheyenne
River Sioux Tribe” and are not subject “to the laws of any state.” Unless the
plaintiff opts out within sixty days, any disputes arising from the agreement
“will be resolved by Arbitration, which shall be conducted by the Cheyenne
River Sioux Tribal Nation by an authorized representative in accordance with
its consumer dispute rules and the terms of this Agreement.” Arbitration would
be conducted by either “(i) a Tribal Elder, or (ii) a panel of three (3)
members of the Tribal Council.” The consumer doesn’t have to pay fees or travel
to the reservation but may participate by phone or video.

To the court of appeals, the case turned on whether the
Tribe had an authorized arbitration mechanism available to the parties and
whether the arbitrator and method of arbitration required under the contract was
actually available. As plaintiffs argued, “[t]ribal leadership … have virtually
no experience in handling claims made against defendants through private
arbitration.” The district court found that “[t]he intrusion of the Cheyenne
River Sioux Tribal Nation into the contractual arbitration provision appear[ed]
to be merely an attempt to escape otherwise applicable limits on interest
charges. As such, the promise of a meaningful and fairly conducted arbitration
[wa]s a sham and an illusion.” The district court referenced a similar case, Inetianbor
v. CashCall, Inc., 962 F. Supp. 2d 1303 (S.D. Fla. 2013), where the arbitrator
selected was a tribal elder who wasn’t a lawyer, had no training in
arbitration, was a co-member with Webb, and was the father of an employee of
one of Webb’s companies. Arbitrators should be free of bias and conflict of
interest. As the district court concluded, “No arbitration award could ever
stand in the instant case if an arbitrator was similarly selected, nor could it
satisfy the concept of a ‘method of arbitration’ available to both parties.” This
kind of selection wasn’t a “method” in any reasonable sense of the word.

The arbitration clause was a specialized forum selection
clause whose validity had to be analyzed under some sovereign's law. As a choice of law
matter, the court of appeals looked to the choice of law clause in the loan
agreements, which referred to the laws of the Tribe. Though there was no tribal
precedent on forum selection clauses, tribal courts borrow from tribal
law where necessary. So to federal law it was.

(In a footnote, the court noted a “more-than-colorable”
argument that the choice of law clause shouldn’t be enforced and Illinois law
ought to govern. According to the Illinois AG (amicus), the loan agreements
violated Illinois public policy, which included a policy against “provisions
requiring plaintiffs to adjudicate claims in a distant, inconvenient forum
where, as in this case, the clause is embedded in contracts ‘involving
unsophisticated consumers in small transactions in the marketplace without any
real opportunity to consider [whether to accept the clause].’” Further, the
plaintiffs noted that the contracts violated Illinois public policy against
usury because they exceed the allowable interest rate under state law. Small
consumer loans were exempted from this requirement if they complied with
Illinois’s Consumer Installment Loan Act. But defendants weren’t entitled to
this exemption because they weren’t licensed in the state and didn’t contend
that they otherwise complied with the other consumer protections in the law,
such as the protection against transfer of debt to an unlicensed owner. However,
the court of appeals found it unnecessary to decide the issue, since the result
was the same under anyone’s law.)

Under federal law, “[t]he presumptive validity of a forum
selection clause can be overcome if the resisting party can show it is
‘unreasonable under the circumstances.’” This occurs if (1) the forum selection
clause was the result of fraud, undue influence or overweening bargaining
power; (2) if the selected forum is so “gravely difficult and inconvenient that
[the complaining party] will for all practical purposes be deprived of its day
in court[]”; or (3) if enforcement of the clauses would contravene a strong
public policy of the forum in which the suit is brought, declared by statute or
judicial decision.

Under this standard, enforcing the forum selection clause would
be unreasonable. While the agreement provides for arbitration by “either (i) a
Tribal Elder, or (ii) a panel of three (3) members of the Tribal Council,” the
record clearly established that such a forum didn’t exist. The Tribe “does not
authorize Arbitration,” it “does not involve itself in the hiring of …
arbitrator[s],” and it does not have consumer dispute rules. “[A]n illusory
forum is unreasonable.”

If the choice of law provision in the contract was invalid, Illinois
law would then govern the validity of the choice of forum provision. Illinois also
used the concept of reasonableness; the prima facie validity of a forum
selection clause was defeated by the unreasonableness of this one. “[T]he
clause was not the product of equal bargaining: It imposes on unsophisticated
consumers a nonexistent forum for resolution of disputes in a location that is
remote and inconvenient.” The usual criteria for evaluating a forum selection
clause didn’t work well because they presupposed that the designated forum
actually existed and was available to resolve the underlying dispute.

The related concept of unconscionability was helpful here:
the choice of forum provision was both procedurally and substantively
unconscionable, applying general law that was not preempted by the FAA. It was
procedurally unconscionable because the Tribe lacked rules for conducting
arbitrations or even for selecting arbitrators. Plus, the court of appeals
agreed with amicus FTC that “[t]he inconsistent language in the loan contracts,
specifying both exclusive Tribal Court jurisdiction and exclusive tribal
arbitration without reconciling those provisions, also ma[de] it difficult for
borrowers to understand exactly what form of dispute resolution they [we]re
agreeing to.” Plus, defendants’ claims concerning the scope of tribal
jurisdiction, as well as their invocation of an irrelevant constitutional
provision, “may [have] induce[d] [the Plaintiffs] to believe, mistakenly, that
they ha[d] no choice but to accede to resolution of their disputes on the
Reservation.” Substantively, the dispute resolution mechanism set out in the
loan agreements didn’t exist. “[T]here simply was no prospect ‘of a meaningful
and fairly conducted arbitration’; instead, this aspect of the loan agreements ‘[wa]s
a sham and an illusion.’”

The FAA didn’t preclude this conclusion. Defendants argued
that the FAA preempted arbitrator bias arguments because arbitrator bias is a
defense that applies only to arbitration. The court of appeals disagreed. “The
arbitration clause here is void not simply because of a strong possibility of
arbitrator bias, but because it provides that a decision is to be made under a
process that is a sham from stem to stern.” The contract language indicated a
process “conducted under the watchful eye of a legitimate governing tribal body,”
but that was in fact impossible. “It hardly frustrates FAA provisions to void
an arbitration clause on the ground that it contemplates a proceeding for which
the entity responsible for conducting the proceeding has no rules, guidelines,
or guarantees of fairness.” Likewise, there was no preemption of Illinois rules
on unconscionability on the ground that they had a disproportionate impact on
arbitration agreements; the court of appeals was just applying general forum
selection rules.

The FAA also provides that a court can designate arbitrators
if there’s a failure to name them, but that provision assumes that the only
infirmity was the unavailability of a particular arbitrator or class of
arbitrators. “Here, however, the likelihood of a biased arbitrator is but the
tip of the iceberg.” The court couldn’t save the process by substituting an
arbitrator in the absence of supervision by the Tribe or rules for arbitration.
Substituting an arbitrator when the parties have agreed to arbitrate makes
sense. But “[t]he contract at issue here contains a very atypical and carefully
crafted arbitration clause designed to lull the loan consumer into believing
that, although any dispute would be subject to an arbitration proceeding in a
distant forum, that proceeding nevertheless would be under the aegis of a
public body and conducted under procedural rules approved by that body.” (Atypical, really?) Parties can agree to arbitrate even if the
initially designated arbitrator or the rules might change.The “auspices of a public entity of tribal
governance” was a basic part of the bargain, for which there was no
substitute.As a result of this
unconscionability, the forum selection clause was unreasonable.

The court of appeals then rejected the defendants’
alternative argument that the forum selection clause required any litigation to
be conducted in the courts of the Cheyenne River Sioux Tribe. I’m not going to
go into detail on that part; here’s
some interesting commentary from an Indian law perspective, focusing on the
dangers the opinion poses for tribal sovereignty more generally.

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